Chief risk officers need to simplify the way in which they report risks to executive management in order to properly convey the importance and usefulness of core enterprise risk management (ERM) elements, a panel of chief risk officers (CROs) said.

The Insurance Advisory Services (IAS) practice of Ernst & Young LLP hosted a roundtable to discuss the preliminary findings of its 2008 Insurance Risk Leadership Survey.

Ernst & Young said the survey found that "while the ERM building blocks are in place, the industry faces significant challenges as it prepares to move to the next level."

ERM is the process of planning and managing the activities of a business to minimize financial, strategic and operational risks in addition to risks associated with accidental losses.

The survey found that when it comes to ERM-related issues, boards focus attention on equity and operational risk, but spend the least amount of time on the company's appetite for risk and ERM policy, which were cited by the roundtable participants as factors that could impact companies sooner.

Ernst & Young said roundtable participants speculated that the limited focus on these core ERM elements may have to do with the complexity with which these issues are presented.

Doug French, managing principal and FSO Insurance Advisory Services leader, Ernst & Young LLP, said, "Board members and business unit heads have no desire to be risk managers, and too often the ERM data presented is difficult to digest and apply to strategic decision making.

"The best way for CROs to be effective is to package the information in a way that is easy to understand. This will lead to informed questioning and give the CRO the opportunity to provide critical risk insight to guide the company in the right direction. Of course, the value of this insight will be directly dependent on the ability to measure risk on a timely basis which remains a challenge."

The survey also found that half of responding CROs indicated that their risk monitoring responsibilities include monitoring equity, interest rate, credit, or operational risk.

While "the vast majority" said they expect to take on those responsibilities in the future, members of the roundtable were surprised at how limited CRO risk monitoring responsibilities are at most organizations, Ernst & Young reported.

Ernst & Young said the roundtable participants agreed that "risk monitoring should be a fundamental element of the CRO position."

However, the survey showed that CROs are "optimistic about the future role of enterprise risk management." Ernst & Young reported that while a majority of companies currently rely on informal processes for evaluating risk versus reward decisions, 60 percent of responding CROs said they expect to have formal structured processes for making these decisions within three years.

Additionally, the survey noted that while just 28 percent of insurers are using economic capital as a key performance measure, 90 percent of surveyed CROs expect EC to be "either a key or main performance measure for their companies within three-to-five years."

Special Reports /

E&Y Survey Shows ERM Challenges For The Future

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